Employee Ownership is a versatile business model

In the September 2014 edition of Expert Guide (Tax) Graeme Nuttall wrote about how the UK employee ownership ("EO") business model is attracting momentum internationally (see "The Employee Ownership Business Model Is Incredibly Welcome News") and how, in particular, new tax exemptions are encouraging employee ownership trust (“EOT”) buy-outs. One year on, this article focuses on the versatility of EO as an ownership and governance model, at all stages in the business lifecycle and provides examples of EO in companies of all sizes and across a wide range of sectors.

EO for start-ups

Introducing EO at the start of the life of a business demonstrates a clear commitment to a collaborative approach to working and, in particular, it "hardwires" into a company's structure a way for employees to have both a say and a financial share in the success of the new venture.

Employee Ownership Association award winner Dan Knowles set aside 10% of the equity for all staff when launching the Mary Knowles Home Care Partnership, with a promise to increase that stake to 100% as the company grows. Start-up probation service provider Laurus Development went straight to a 25% shareholding held in trust for the benefit of all employees. A stake of 25% is increasingly recognised as the minimum stake needed for a privately owned company to say it has EO.

Others have opted for complete EO from the outset. 100% of the shares in both Marine Engineering Partnership and Arrowfield Veterinary Practice are owned on behalf of all employees by an employee trust. Founding director of Arrowfield, Paul Buckingham said (in Fieldfisher's press release): "We settled on the employee ownership trust model because it means our vets, nurses, office and support teams own the business together and have a say in how it's run, as well as a stake in its long-term success; we all have an interest in delivering the very best service to our community".

EO for an established business

In an established business, EO provides a way to develop and grow a company. The Nuttall Review of Employee Ownership (BIS, 2012) highlighted how EO can, in particular, drive innovation in a company, as well as achieving greater employee commitment and engagement.

Stride Treglown, the 10th largest architectural practice in the UK, moved to widespread share ownership among its employees in February 2015. In Fieldfisher's press release, Chairman of Stride Treglown, David Hunter said:

"The culture of our practice has always been collaborative, so employee ownership was a logical step for us to take. The transformation from a traditional architectural partnership into a 280-strong employee-owned company is momentous but exciting… with every member of our staff now having a commitment and share in the company’s future, we are really looking forward to another 60 years of exceptional work for our clients".

IT and business services partner Agilisys is the largest business yet (the authors believe) to covert to majority EOT ownership. In Agilisys' announcement of its move to employee ownership, its Chairman and one of its founders Charles Mindenhall said:

"I believe that by introducing significant employee ownership it will provide an exciting structure for the continued growth of Agilisys which is strongly consistent with and a natural extension to the collaborative culture and principles which are in place within the Agilisys group"

The UK Government continues to support EO. The Rt Hon Matthew Hancock MP, Minister for the Cabinet Office and Paymaster General, added:

"As an innovative company providing services to government, I am delighted that Agilisys has recently adopted the new “John Lewis-style mutual” Employee Ownership Trust model. The government totally supports employee owned business models. Research has demonstrated that giving employees a ‘stake’ in the organisation they work for drives increased performance in the services they provide, delivers improved employee commitment, and is overall better for the UK economy."

EO and management succession

EO can provide a long-term plan for management succession. It provides an alternative to a management buy-out, without the need for new managers to raise the finance to buy a stake in the company. This was part of the reasoning behind the move to majority EOT ownership by champions of good urban design, Tibbalds. As Darren Smith, Studio and Marketing Manager and one of Tibbalds’ four, new, elected Trustee Directors, explains:

“We already have a shared vision and ethos, but putting in place the Employee Ownership Trust means that they are now underpinned by a more tangible, financial stake for everyone. Routes to a financial share in the practice are open to everyone, there is greater transparency about how things are run and we are more attractive to new team members."

EO and ownership succession

EO remains an ideal way for founders to sell a company. Those wishing to maintain their business as a successful, independent trading enterprise, often choose EO as an ownership succession solution in preference to a trade sale or other traditional form of exit.

Architectural visualisation studio Hayes Davidson is now 100% EOT owned because this provides a long-term, secure way of owning the business: one that underpins genuine employee engagement. Leaders in standby power solutions, PB Design is an engineering firm that is also now 100% EOT owned. The new structure means employees via the PB Design EOT have a permanent financial interest in the profits of PB Design and there is no need ever again to plan for who will succeed to the ownership of the company.

EO and business rescues

EO has also been used in business restructuring and rescue situations (see further in paras 3.41-43 of the Nuttall Review).

The benefits of EO

Supporters of EO are confident of its benefits: it helps deliver better business performance and a more engaged and happier workforce. Recent research published by the Chartered Management Institute helps explain why (see the CMI website for further information). The MoralDNA™ of Employee Owned Companies interim report found that "94% agree that being employee owned positively affects people’s commitment to the organisation, while 86% agreed it improves their ability to attract new staff. 90% said it improves overall performance, while almost four in five (79%) said that it encourages longer-term decision-making". Full results will be published at end of September 2015 and move positive news is expected. Ann Francke, Chief Executive of the Chartered Management Institute has called for more employee ownership:

"Employee ownership goes hand in hand with more democratic management styles. Our research shows the benefits are clear, with high levels of employee commitment, more caring ethical mindsets and a more long-term approach to business decisions. The economy would benefit from having more employee owned companies and we can all learn from their example.”

This article highlights the versatility of the EO business model and shows how the benefits of EO can be realised at every stage in the business lifecycle.

Graeme Nuttall is a partner in Fieldfisher's Tax and structuring practice in London. He received an OBE in the Queen's 2014 Birthday Honours for services to employee share schemes, public service mutuals and employee ownership. He helped develop the UK's EMI share option arrangement. As the UK Government's independent adviser on employee ownership, he produced Sharing Success: The Nuttall Review of Employee Ownership. The UK Government supported all the Nuttall Review's recommendations including changes in UK company law to make share buy backs easier and the Finance Act 2014's new tax exemptions to promote the trust model of employee ownership Email: graeme.nuttall@fieldfisher.com Twitter @nuttallreview

Jennifer Martin is a Senior Associate in Fieldfisher's Tax and structuring practice in London. She advises companies and business owners and has developed expertise in advising on business transformations and tax structuring, both in the public and private sectors often with an employee ownership element. Email: jennifer.martin@fieldfisher.com